Trends in the 2024 Credit Landscape

Our analysts Michael Cyprys and Stephen Grambling discuss prediction markets’ rising popularity and how they could disrupt the U.S. sports betting industry.----- Transcript -----Michael Cyprys: Welcome to Thoughts on the Market. I'm Mike Cyprys, Morgan Stanley's head of U.S. Brokers, Asset Managers, and Exchanges Research.Stephen Grambling: And I'm Stephen Grambling, head of U.S. Gaming, Lodging, and Leisure.Michael Cyprys: Today, we'll talk about sports betting and how prediction markets can disrupt it.It's Wednesday, March 19th at 10 am in New York.Sports betting used to be against the law in most of America, outside of Nevada. That changed in 2018, when the U.S. Supreme Court declared a federal ban on sports betting to be unconstitutional. As a result, many American states legalized sports betting. Over the last seven years, it's become even more popular and profitable. The American sports betting industry posted a record [$]13.7 billion of revenues last year. That's up from 2023's record of [$]11 billion, according to the American Gaming Association.Now, prediction markets are set to potentially disrupt this industry.Stephen, to set the stage, how is the U.S. sports betting industry currently organized and regulated?Stephen Grambling: Well, as you mentioned, Mike, with the overturning of the Professional and Amateur Sports Protection Act in 2018, legalization of sports betting turned to the states. The path to legislation varies by state with different constituents to consider – beyond even the local government. You know, Senate and Congress, but also tribal casinos, commercial casinos, sports teams, leagues, etc.We now have 38 states plus D.C. and Puerto Rico offering legal sports betting in some format, collecting billions of dollars in taxes in aggregate. At this point, the big states that are remaining are really only Texas, Florida, Georgia, and California. Each state forms its own framework across taxes, what sports can or can't bet on, and regulations around advertising. This means a separate commission for each state regulates the industry, in conjunction with state lawmakers,Michael Cyprys: I see. And what exactly are betting exchanges and how do they fit within the U.S. sports betting market?Stephen Grambling: Betting exchanges have existed for a long time in markets around the world. These are really exchanges – and are platforms – where individuals can bet directly against each other on an event outcome, rather than against a bookmaker. These exchanges match opposing bets and then take a commission on the winnings and typically offer better odds by eliminating traditional bookmaker margins.That said, the all in commission can range at two to five per cent. Whereas the spread on a traditional singles bet is about five to six per cent. So, it's relatively small. This is also known as the, the vigorish or the vig, or what the book gets to keep. Due to the need to be perfectly balanced as an exchange, these platforms, which operate in various markets, as I said around the world, are generally more akin to premarket, single bets. So single bet, or sometimes people call them straight bets, are really just betting on the outcome of a match or the over-under. They don't typically impact things like multi leg bets, also known as parlays, since there's less of a consistent betting pool.Because the type of bets are more limited than what a sports book offers, these exchanges somewhat plateaued in popularity in markets like the UK. For frame of reference, we estimate these singles bets are about $900 million in markets where it's legal for sports betting, and roughly another $800 million in states without legislation.Again, this is really just the market for people who only bet on that type of bet; that don't do both singles bets and parlays, or parlays alone.Mike, maybe turning it back to you, sports betting is a type of prediction market. But from where you sit, how would you define prediction markets more broadly, and can you give some examples?Michael Cyprys: Sure. So prediction markets are a type of marketplace where event contracts trade. Sometimes they're called forecast markets or even information markets. A core feature here is trading an outcome at an event, such as the November election, economic indicators, or even corporate events. But unlike futures contracts, event contracts have a defined risk and defined reward.Generally, they're structured as binary options, which can be easily understood. For instance, a contract could pay a dollar if the consumer price index, or CPI, exceeds say, 3 per cent in March. If an investor buys that contract for 75 cents, they could generate a 25 percent potential return if CPI comes in over 3 per cent and they collect a dollar on that contract.Now, the counterparty on the other side of that trade is the investor who sold that contract, collected the 75 cents, and they would stand to lose 25 cents potentially – if they held on to that contract, paid out the full dollar in the event that CPI came in hot.What's interesting is the price of that contract becomes the best forecast of that event happening, and so this can provide a lot of information value.Stephen Grambling: So, it sounds like you could bet on just about anything, so are these prediction markets legal?Michael Cyprys: Not only are they legal, they've been around for some time – though perhaps more esoteric in nature, in terms of where we have seen contracts and types of events traded on marketplaces. They've been geared more towards end users and farmers. For example, event contracts on the weather have been listed on a Chicago derivative exchange for over 25 years.What's new and interesting is that we're seeing new exchange upstarts enter the space. They're innovating, they're broadening access to retail investors, and they're benefiting from the confluence of a number of different trends around technology improvements – with mobile trading in recent years, the speed and access to information, the ease of account opening, broadly retail investors coming into the marketplace, and the pure simplicity and intuitive nature of event contracts.The 2024 election sparked people's interest in event contracts. And that's persisting post election. In the coming months, we do expect a large retail brokerage platform in the U.S. to really help potentially mainstream event contracts.Coming back to your legality point and question. One area of open debate, though, is around the legality of sports event contracts, where we expect regulators to provide some clarity around that in the months ahead.Stephen Grambling: Interesting, so some have also argued that the prediction markets are not just the future of trading, but for information in general. Do you think prediction markets can be a disruptive force in finance then?Michael Cyprys: Over time, potentially, yes. I do think that's going to require participation from both retail as well as institutional investors that can help fuel robust and liquid marketplace. The sheer simplicity is helpful in terms of driving retail adoption; but for institutional investors and corporates, they could look to prediction markets as a valuable hedging tool, with insurance-like properties – not to mention the information value that can be derived.Stephen, given our discussion of prediction markets and their relevance for sports betting, how are you framing the potential for risk and opportunity for the sports betting industry from the application of prediction market models?Stephen Grambling: There's a bit of a put and take wherein existing sports betting markets, that's where it's legal, the industry may face new competition. So, the incumbents will face new competition from these prediction markets being opened up. On the other hand, a new regulatory framework could also open up new states; so the states that I referenced before that are still out there that haven't been legalized, all of a sudden become fair game.Given the size of these new states, as I mentioned, folks like California, Texas, Florida; these are enormous economies, and they're roughly equal to the size of the existing markets. So, the potential upside opportunity, we think, actually outweighs the competitive risks. And we quantify this as being potentially in the hundreds of millions of dollars, an incremental EBITDA to some of the incumbents that operate in the space.Michael Cyprys: That's fascinating, Stephen. Thanks for taking the time to talk.Stephen Grambling: Great speaking with you, Mike.Michael Cyprys: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

19 Mar 7min

Our Chief Fixed Income Strategist Vishy Tirupattur explains why credit markets have held firm amid macro volatility, and the scenarios which could hurt its strong foundation.----- Transcript -----Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley’s Chief Fixed Income Strategist. Today, I will talk about why credit markets have been resilient even as other markets have been volatile – and market implications going forward. It's Tuesday, March 18th, at 11 am in New York. Market sentiment has shifted quickly from post-election euphoria and animal spirits to increasingly growing concern about downside risks to the U.S. economy, driven by ongoing policy uncertainty and a spate of uninspiring soft data. However, signaling from different markets has not been uniform. For example, after reaching an all-time high just a few weeks ago, the S&P 500 index has given up all of its gains since the election and then some. Treasury yields have also yo-yoed, from a 40-basis points selloff to a 60+ basis points rally. Yet in the middle of this volatility in equities and rates, credit markets have barely budged. In other words, credit has been a low beta asset class so far. This resilience which resonates with our long-standing constructive view on credit has strong underpinnings. We had expected that many of the supporting factors from 2024 would continue – such as solid credit fundamentals, strong investor demand driven by elevated overall yields rather than the level of spreads. While we expected the economic growth in 2025 to slow somewhat, to about 2 per cent, we thought that would still be a robust level for credit investors. These expectations have largely played out until recently. While we maintain our overall positive stance on credit, some of the factors contributing to its resilience are changing, calling the persistence of credit’s low beta into question. While we did anticipate that sequencing and severity of policy would be key drivers of the economy and markets in 2025, growth constraining policies, especially tariffs, have come in faster and broader than what we had penciled in. Incorporating these policy signals, our U.S. economists have marked down real GDP growth to 1.5 per cent in 2025 and 1.2 per cent in 2026. From a credit perspective, we would highlight that our economists are not calling for a recession. Their growth expectations still leave us in territory we would deem credit friendly, although edging towards the bottom of our comfort zone. On the positive side of the ledger, cooling growth may also temper animal spirits and continue to constrain corporate debt supply, keeping market technicals supportive. Also, while treasury yields have rallied, overall yields are still at levels that sustain demand from yield-motivated buyers. That said, if growth concerns intensify from these levels, with weakness in soft data spreading notably to hard data, the probability of markets assigning above-average recession probabilities will increase. This could challenge credit’s low beta, that has prevailed so far, and the credit beta could increase on further drawdowns in risk assets. Thanks for listening. If you enjoy the show, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

18 Mar 3min

Our CIO and Chief U.S. Equity Strategist Mike Wilson explains the stock market tumble and whether investors can hope for a rally.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist. Today on the podcast I’ll be discussing the recent Equity Market correction and what to look for next. It's Monday, March 17th at 11:30am in New York. So let’s get after it. Major U.S. equity Indices are as oversold as they've been since 2022. Sentiment, positioning gauges are bearish, and seasonals improve in the second half of March for earnings revisions and price. Furthermore, recent dollar weakness should provide a tailwind to first quarter earnings season and second quarter guidance, particularly relative to the fourth quarter results; and the decline in rates should benefit economic surprises. In short, I stand by our view that 5,500 on the S&P 500 should provide support for a tradable rally led by lower quality, higher beta stocks that have sold off the most, and it looks like it may have started on Friday. The more important question is whether such a rally is likely to extend into something more durable and mark the end of the volatility we’ve seen YTD? The short answer is – probably not. First, from a technical standpoint there has been significant damage to the major indices—more than what we witnessed in recent 10 per cent corrections, like last summer. More specifically, the S&P 500, Nasdaq 100, Russell 1000 growth and value indices have all traded straight through their respective 200-day moving averages, making these levels now resistance, rather than support. Meanwhile, many stocks are closer to a 20 per cent correction with the lower quality Russell 2000 falling below its 200 week moving average for the first time since the 2022 bear market. At a minimum, this kind of technical damage will take time to repair, even if we don’t get additional price degradation at the index level. In order to forecast a larger, sustainable recovery, it’s important to acknowledge what’s really been driving this correction. From my conversations with institutional investors, there appears to be a lot of focus on the tariff announcements and other rapid-fire policy announcements from the new administration. While these factors are weighing on sentiment and confidence, other factors started this correction in December. In our year ahead outlook, we forecasted a tougher first half of the year for several reasons. First, stocks were extended on a valuation basis and relative to the key macro and fundamental drivers like earnings revisions, which peaked in early December. Second, the Fed went on hold in mid-December after aggressively cutting rates by 100 basis points over the prior three months. Third, we expected AI capex growth to decelerate this year and investors now have the DeepSeek development to consider. Add in immigration enforcement, the Department of Government Efficiency (DOGE) exceeding expectations, and tariffs – and it’s no surprise that growth expectations are hitting equities in the form of lower multiples. As noted, we highlighted these growth headwinds in December and have been citing a first half range for the S&P 500 of 5500-6100 with a preference for large cap quality. Finally, President Trump has recently indicated he is not focused on the stock market in the near term as a barometer of his policies and agenda. Perhaps more than anything else, this is what led to the most recent technical breakdown in the S&P 500. In my view, it will take more than just an oversold market to get more than a tradable rally. Earnings revisions are the most important variable and while we could see some seasonal strength or stabilization in revisions, we believe it will take a few quarters for this factor to resume a positive uptrend. As noted in our outlook, the growth-positive policy changes like tax cuts, de-regulation, less crowding out and lower yields could arrive later in the second half of the year – but we think that’s too far away for the market to contemplate for now. Finally, while the Trump put apparently doesn’t exist, the Fed put is alive and well, in our view. However, that will likely require conditions to get worse either on growth, especially labor, or in the credit and funding market, neither of which would be equity-positive, initially. Bottom line, a short-term rally from our targeted 5500 level is looking more likely after Friday’s price action. It’s also being led by lower quality stocks. This helps support my secondary view that the current rally is unlikely to lead to new highs until the numerous growth headwinds are reversed or monetary policy is loosened once again. The transition from a government heavy economy to one that is more privately driven should ultimately be better for many stocks. But the path is going to take time and it is unlikely to be smooth. Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

17 Mar 5min

As equity markets gyrate in response to unpredictable U.S. policy, credit has taken longer to respond. Our Head of Corporate Credit Research, Andrew Sheets, suggests other indicators investors should have an eye on, including growth data.----- Transcript -----Welcome to Thoughts on the Market. I’m Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Today on the podcast, I’ll be discussing how much comfort or concern equity and credit markets should be taking from each other’s recent moves.It’s Friday, March 14th at 2pm in London. Credit has weakened as markets have gyrated in the face of rising uncertainty around U.S. economic policy. But it has been a clear outperformer. The credit market has taken longer to react to recent headlines, and seen a far more modest response to them. While the U.S. stock market, measured as the S&P 500, is down about 10 per cent, the U.S. High Yield bond index, comprised of lower-rated corporate bonds, is down about just 1 per cent.How much comfort should stock markets take from credit’s resilience? And what could cause Credit to now catch-down to that larger weakness in equities?A good place to start with these questions is what we think are really three distinct stories behind the volatility and weakness that we’re seeing in markets. First, the nature of U.S. policy towards tariffs, with plenty of on-again, off-again drama, has weakened business confidence and dealmaking; and that’s cut off a key source of corporate animal spirits and potential upside in the market. Second and somewhat relatedly, that reduced upside has lowered enthusiasm for many of the stocks that had previously been doing the best. Many of these stocks were widely held, and that’s created vulnerability and forced selling as previously popular positions were cut. And third, there have been growing concerns that this lower confidence from businesses and consumers will spill over into actual spending, and raise the odds of weaker growth and even a recession.I think a lot of credit’s resilience over the last month and a half, can be chalked up to the fact that the asset class is rightfully more relaxed about the first two of these issues. Lower corporate confidence may be a problem for the stock market, but it can actually be an ok thing if you’re a lender because it keeps borrowers more conservative. And somewhat relatedly, the sell-off in popular, high-flying stocks is also less of an issue. A lot of these companies are, for the most part, quite different from the issuers that dominate the corporate credit market.But the third issue, however, is a big deal. Credit is extremely sensitive to large changes in the economy. Morgan Stanley’s recent downgrade of U.S. growth expectations, the lower prices on key commodities, the lower yields on government bonds and the underperformance of smaller more cyclical stocks are all potential signs that risks to growth are rising. It's these factors that the credit market, perhaps a little bit belatedly, is now reacting to.So what does this all mean?First, we’re mindful of the temptation for equity investors to look over at the credit market and take comfort from its resilience. But remember, two of the biggest issues that have faced stocks – those lower odds of animal spirits, and the heavy concentration in a lot of the same names – were never really a credit story. And so to feel better about those risks, we think you’ll want to look at other different indicators.Second, what about the risk from the other direction, that credit catches up – or maybe more accurately down – to the stock market? This is all about that third factor: growth. If the growth data holds up, we think credit investors will feel justified in their more modest reaction, as all-in yields remain good. But if data weakens, the risks to credit grow rapidly, especially as our U.S. economists think that the Fed could struggle to lower interest rates as fast as markets are currently hoping they will.And so with growth so important, and Morgan Stanley’s tracking estimates for U.S. growth currently weak, we think it's too early to go bottom fishing in corporate bonds. Thanks for listening. If you enjoy the show, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

14 Mar 4min

Our Chief Asia Economist Chetan Ahya discusses the early indications of India’s economic recovery and why the country looks best-positioned in the region for growth.----- Transcript -----Welcome to Thoughts on the Market. I’m Chetan Ahya, Morgan Stanley’s Chief Asia Economist. Today I’ll be taking a look at the Indian economy amidst escalating trade tensions in Asia and around the globe. It’s Thursday, March 13, at 2pm in Hong Kong.Over the last few months, investors have been skeptical about India’s growth narrative. Investors – like us – have been caught off-guard by the surprising recent slowdown in India’s growth. With the benefit of hindsight, we can very clearly attribute the slowdown to an unexpected double tightening of fiscal and monetary policy. But India seems to be on its way to recovery. Green shoots are already emerging in recent data. And we believe the recovery will continue to firm up over the coming months. What makes us so confident in our outlook for India? We see several key factors behind this trend: First, fiscal policy’s turning supportive for growth again. The government has been ramping up capital expenditure for infrastructure projects like roads and railways, with growth accelerating markedly in recent months. They have also cut income tax for households which will be effective from April 2025. Second, monetary policy easing across rates, liquidity, and the regulatory front. With CPI inflation recently printing at just 3.6 per cent which is below target, we believe the central bank will continue to pursue easy monetary policy. And third, moderation in food inflation will mean real household incomes will be lifted. Finally, the strength in services exports. Services exports include IT services, and increasingly business services. In fact, post-COVID India’s had very strong growth in business services exports. And the key reason for that is, post-COVID, I think businesses have come to realize that if you can work from home, you can work from Bangalore. India's services exports have nearly doubled since December 2020, outpacing the 40 per cent rise in goods exports over the same period. This has resulted in services exports reaching $410 billion on an annualized basis in January, almost equal to the $430 billion of goods exports. Moreover, India continues to gain market share in services exports, which now account for 4.5 per cent of the global total, up from 4 per cent in 2020. To be sure there are some risks. India does face reciprocal tariff risks due to its large trade surplus with the US and high tariff rates that India imposes select imports from the U.S. But we believe that by September-October this year, India can reach a trade deal with the U.S. In any case, India's goods exports-to-GDP ratio is the lowest in the region. And even if global trade slows down due to tariff uncertainties, India's economy won't be as severely affected. In fact, it could potentially outperform the other economies in the region.Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

13 Mar 3min

While tariffs continue to dominate headlines, our Global Head of Fixed Income Research and Public Policy Strategy Michael Zezas suggests investors should also focus on the sectoral impacts of additional U.S. policy choices.----- Transcript -----Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan Stanley’s Global Head of Fixed Income Research and Public Policy Strategy. Today, we’ll be talking about U.S. policy impacts on the market that aren’t about tariffs.It’s Wednesday, March 12th, at 10:30am in New York.If tariffs are dominating your attention, we sympathize. Again this week we heard the U.S. commit to raising tariffs and work out a resolution, this time all within the span of a workday. These twists and turns in the tariff path are likely to continue, but in the meantime it might make sense for investors to take some time to look away – instead focusing on some key sectoral impacts of U.S. policy choices that our Research colleagues have called out. For example, Andrew Percoco, who leads our Clean Energy Equity Research team, calls out that clean Energy stocks may be pricing in too high a probability of an Inflation Reduction Act (IRA) repeal. He cites a letter signed by 18 Republicans urging the speaker of the house to protect some of the energy tax credits in the IRA. That’s a good call out, in our view. Republicans’ slim majority means only a handful need to oppose a legislative action in order to block its enactment. Another example is around Managed Care companies. Erin Wright, who leads our Healthcare Services Research Effort, analyzed the impact to companies of cuts to the Medicaid program and found the impact to their sector’s bottom line to be manageable. So, keeping an in-line view for the sector. We think the sector won’t ultimately face this risk, as, like with the IRA, we do not expect there to be sufficient Republican votes to enact the cuts. Finally, Patrick Wood, who leads the Medtech team, caught up with a former FDA director to talk about how staffing cuts might affect the industry. In short, expect delays in approvals of new medical technologies. In particular, it seems the risk is most acute in the most cutting edge technologies, where skilled FDA staff are hard to find. Neurology and brain/computer interfaces stand out as areas of development that might slow in this market sector. All that said, if you just can’t turn away from tariffs, we reiterate our guidance here: Tariffs are likely going up, even if the precise path is uncertain. And whether or not you’re constructive on the goals the administration is attempting to achieve, the path to achieving them carries costs and execution risk. Our U.S. economics team’s recent downgrade of the U.S. growth outlook for this and next year exemplifies this. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

12 Mar 2min

Our analysts Adam Jonas and Michelle Weaver share a glimpse into the future from Morgan Stanley’s Annual Tech, Media, and Telecom (TMT) Conference, as agentic AI powers autonomous vehicles, humanoid robots and more.

11 Mar 11min

Our Head of U.S. IT Hardware Erik Woodring gives his key takeaways from Morgan Stanley’s Technology, Media and Telecom (TMT) conference, including why there appears to be a long runway ahead for AI infrastructure spending, despite macro uncertainty. ----- Transcript -----Welcome to Thoughts on the Market. I’m Erik Woodring, Morgan Stanley’s Head of U.S. IT Hardware Research. Here are some reflections I recorded last week at Morgan Stanley’s Technology, Media, and Telecom Conference in San Francisco. It’s Monday, March 10th at 9am in New York. This was another year of record attendance at our TMT Conference. And what is clear from speaking to investors is that the demand for new, under-discovered or under-appreciated ideas is higher than ever. In a stock-pickers’ market – like the one we have now – investors are really digging into themes and single name ideas. Big picture – uncertainty was a key theme this week. Whether it’s tariffs and the changing geopolitical landscape, market volatility, or government spending, the level of relative uncertainty is elevated. That said, we are not hearing about a material change in demand for PCs, smartphones, and other technology hardware. On the enterprise side of my coverage, we are emerging from one of the most prolonged downcycles in the last 10-plus years, and what we heard from several enterprise hardware vendors and others is an expectation that most enterprise hardware markets – PCs , Servers, and Storage – return to growth this year given pent up refresh demand. This, despite the challenges of navigating the tariff situation, which is resulting in most companies raising prices to mitigate higher input costs. On the consumer side of the world, the demand environment for more discretionary products like speakers, cameras, PCs and other endpoint devices looks a bit more challenged. The recent downtick in consumer sentiment is contributing to this environment given the close correlation between sentiment and discretionary spending on consumer technology goods. Against this backdrop, the most dynamic topic of the conference remains GenerativeAI. What I’ve been hearing is a confidence that new GenAI solutions can increasingly meet the needs of market participants. They also continue to evolve rapidly and build momentum towards successful GenAI monetization. To this point, underlying infrastructure spending—on servers, storage and other data center componentry – to enable these emerging AI solutions remains robust. To put some numbers behind this, the 10 largest cloud customers are spending upwards of [$]350 billion this year in capex, which is up over 30 percent year-over-year. Keep in mind that this is coming off the strongest year of growth on record in 2024. Early indications for 2026 CapEx spending still point to growth, albeit a deceleration from 2025. And what’s even more compelling is that it’s still early days. My fireside chats this week highlighted that AI infrastructure spending from their largest and most sophisticated customers is only in the second inning, while AI investments from enterprises, down to small and mid-sized businesses, is only in the first inning, or maybe even earlier. So there appears to be a long runway ahead for AI infrastructure spending, despite the volatility we have seen in AI infrastructure stocks, which we see as an opportunity for investors. I’d just highlight that amidst the elevated market uncertainty, there is a prioritization on cost efficiencies and adopting GenAI to drive these efficiencies. Company executives from some of the major players this week all discussed near-term cost efficiency initiatives, and we expect these efforts to both help protect the bottom line and drive productivity growth amidst a quickly changing market backdrop. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

10 Mar 4min